• Hannah

Are You On Track?

One of the most asked questions regarding financial planning is: “Am I on track?” Given the implications of the answer to that question, it’s a pretty meaningful one. It’s also a difficult question to answer because it’s so specific to your situation and the unknown future. Still, it needs answering. To begin, I find it helpful to consider what the end goal is. For most retirement plans, the idea is that your investment portfolio would be large enough to generate your income needs by way of interest, dividends, and gains. For example, if we assume that your post-retirement portfolio will earn 5% on average[i] each year, we can expect a portfolio of $1 million to provide $50,000 to you each year. While you could certainly take more from the portfolio, doing so would drawdown on the portfolio base generating that income for you, resulting in a lower income in the future.


This approach to estimating how much you will need in retirement gives us an idea of our end goal. Next, we have to ask what we need to be saving each year to achieve that goal. If we aren’t investing our savings, the math is simple. We take the amount we hope to save and divide it by the number of years we have left to save for that goal. If I want to have $1 million saved by the time I retire and I hope to retire at age 65, and I’m currently 30, then I would divide $1 million by 35 and find that I need to save roughly $28,500 a year. That is a lot of money to save each year; however, if I’m investing what I save in the markets and making money off those investments, I don’t have to save nearly as much. The downside is - the math starts to get tricky. We run into concepts like compounding returns and discounting. To simplify things, we can use basic rules of thumb like the following example provided by JPMorgan’s retirement research team:

Looking at the chart, it’s important first to understand the assumptions being utilized. They are assuming that you are saving 10% of your income each year, earning an average annualized return of 6% before retirement and 5% after retirement. They have also assumed an average annual inflation rate of 2% and expect you to retire at the age of 65 and be retired for 30 years. Knowing this, you can then move over to the chart to get an idea of how much you should already have saved. Let’s say you are 35 and making a collective household income of $125,000 (you and your spouse together). At this point you should have saved 1.6x your household income: 1.6 x $125,000 = $200,000.

If you find that you are behind that number, you might want to consider upping your annual savings to get caught up. Furthermore, while this chart is a helpful rule of thumb, it is not an exact science. You may have less saved than recommended, but if you have been saving after-tax dollars, you will owe less in taxes when you start to distribute those funds for retirement and consequently won’t need to have as much saved. Additionally, if you’re just getting started and your goal feels out of reach, don’t panic. The first step is simply to start. Start saving what you can. Commit to saving future raises as well. We typically advise our younger clients to aim for saving between 10-15% of their income at the onset of their careers, increasing their savings over time until they are eventually able to max out their annual savings based on the retirement vehicles offered to them. Lastly, if you’d like to discuss your specific situation and whether you’re on track, please don’t hesitate to contact us. We’d be happy to talk through your situation with you and offer our thoughts.


[i] This is an assumption and not a guarantee. Returns are never guaranteed, but we can use conservative estimates to help us plan.


Principles for a Successful Retirement, JPMorgan, 2021, am.jpmorgan.com/us/en/asset-management/mod/insights/retirement-insights/principles/.

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hannah.boundy@sherwoodfp.com

Arvada, Colorado

Westlake Village, California

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